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remember these outrageous seconds: pay a fixed interest and principal, pay a variable interest and principal, or pay a variable interest only, minimal to start. A popular pick among the sheeple was door-to-hell #3 . Who but a mob Shylock would offer these debt traps . . . what regulatory agency would even allow them . . . .
By GRETCHEN MORGENSON
During the initial years of home equity credit lines, borrowers must pay only interest. Borrowers can also pay down principal if they wish, but many homeowners, short on cash, haven’t done so. At Wells Fargo, for example, in the quarter ended March 31, some 44 percent of the bank’s home equity borrowers paid only the minimum amount due.
Being required to pay only the interest on these loans has made them easier for troubled borrowers to carry. But these easy terms are about to get tougher. What’s known as the initial draw period for home equity lines of credit is coming to an end for many borrowers. Soon, they will have to pay principal as well.
Ten days ago, the Office of the Comptroller of the Currency published some frightening figures about the looming payments. In its spring 2012 “Semiannual Risk Perspective,” it said that almost 60 percent of all home equity line balances would start requiring payments of both principal and interest between 2014 and 2017.
The amounts owed in these lines of credit climb significantly in coming years. While $11 billion in home equity lines are starting to require principal and interest payments this year, the amount jumps to $29 billion by 2014, the office said. That is followed by a surge to $53 billion in 2015 and $73 billion in 2017. For 2018 and beyond, it’s $111 billion.
“Home equity borrowers face three potential issues,” the report concluded. They include risk from rising interest rates — most of these loans have adjustable rates — and payment shock as borrowers realize they have to pay down principal. Refinancing difficulties are also a problem, it said, “because collateral values have declined significantly since these loans were originated.”
That’s for sure. The properties backing many of these loans are no longer worth the amounts borrowed on them. And those amounts are enormous. In the first quarter of 2012, the top four banks held $295.1 billion in revolving residential lines of credit, according to Amherst Securities. Using data from the Federal Reserve, Amherst said Bank of America held $101.4 billion; Wells Fargo, $93.3 billion; JPMorgan Chase, $84.4 billion; and Citigroup, $15.9 billion. As a result, the risks to borrowers cited in the comptroller’s office report will also be faced by their lenders.
How banks value these loans has become a hot topic among investors and regulators. This is to be expected, given that so many home equity lines are no longer collateralized by boom-era home values. Last January, for example, financial regulators issued supervisory guidance on how banks should adjust allowances for losses on these loans. And in the first quarter, Wells Fargo said it moved $1.7 billion in junior lien mortgages to nonaccrual status as a result of the guidance. That caused an increase in the bank’s nonperforming assets to $26.6 billion, a 33 percent rise.
But in the second quarter, Wells Fargo showed a 13 percent decline in nonperforming loan balances among junior lien mortgages.
These are among the riskiest loans in any bank’s portfolio. As borrowers are pressed to pay principal and interest, write-offs are almost certain to rise.
Payment shock for borrowers is nigh.
http://www.nytimes.com/2012/07/15/bu...1&ref=business
By GRETCHEN MORGENSON
During the initial years of home equity credit lines, borrowers must pay only interest. Borrowers can also pay down principal if they wish, but many homeowners, short on cash, haven’t done so. At Wells Fargo, for example, in the quarter ended March 31, some 44 percent of the bank’s home equity borrowers paid only the minimum amount due.
Being required to pay only the interest on these loans has made them easier for troubled borrowers to carry. But these easy terms are about to get tougher. What’s known as the initial draw period for home equity lines of credit is coming to an end for many borrowers. Soon, they will have to pay principal as well.
Ten days ago, the Office of the Comptroller of the Currency published some frightening figures about the looming payments. In its spring 2012 “Semiannual Risk Perspective,” it said that almost 60 percent of all home equity line balances would start requiring payments of both principal and interest between 2014 and 2017.
The amounts owed in these lines of credit climb significantly in coming years. While $11 billion in home equity lines are starting to require principal and interest payments this year, the amount jumps to $29 billion by 2014, the office said. That is followed by a surge to $53 billion in 2015 and $73 billion in 2017. For 2018 and beyond, it’s $111 billion.
“Home equity borrowers face three potential issues,” the report concluded. They include risk from rising interest rates — most of these loans have adjustable rates — and payment shock as borrowers realize they have to pay down principal. Refinancing difficulties are also a problem, it said, “because collateral values have declined significantly since these loans were originated.”
That’s for sure. The properties backing many of these loans are no longer worth the amounts borrowed on them. And those amounts are enormous. In the first quarter of 2012, the top four banks held $295.1 billion in revolving residential lines of credit, according to Amherst Securities. Using data from the Federal Reserve, Amherst said Bank of America held $101.4 billion; Wells Fargo, $93.3 billion; JPMorgan Chase, $84.4 billion; and Citigroup, $15.9 billion. As a result, the risks to borrowers cited in the comptroller’s office report will also be faced by their lenders.
How banks value these loans has become a hot topic among investors and regulators. This is to be expected, given that so many home equity lines are no longer collateralized by boom-era home values. Last January, for example, financial regulators issued supervisory guidance on how banks should adjust allowances for losses on these loans. And in the first quarter, Wells Fargo said it moved $1.7 billion in junior lien mortgages to nonaccrual status as a result of the guidance. That caused an increase in the bank’s nonperforming assets to $26.6 billion, a 33 percent rise.
But in the second quarter, Wells Fargo showed a 13 percent decline in nonperforming loan balances among junior lien mortgages.
These are among the riskiest loans in any bank’s portfolio. As borrowers are pressed to pay principal and interest, write-offs are almost certain to rise.
Payment shock for borrowers is nigh.
http://www.nytimes.com/2012/07/15/bu...1&ref=business